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It used to be that suggesting World Trade Organization (WTO) members should negotiate a multilateral agreement on investment would attract incredulous stares. After all, the OECD tried, and failed spectacularly, in the late 1990s. That attempt was widely seen in the developing world as a plot by rich countries to open their markets to multinational corporations, and its failure as successful resistance to western designs. Less well-known is that the multilateral agreement on investment failed primarily because OECD countries could not agree on meaningful provisions.

How the world has changed. Now developing countries account for about a quarter of global FDI (foreign direct investment) outflows and business schools are awash with a burgeoning set of emerging market multinational corporation case studies. A key factor driving these changes has been the continued growth of global value chains, where different parts of a business’s activities – from manufacturing to marketing – take place in different parts of the world. Whereas this used to be a feature of companies in the developed world, there is a rapidly growing trend for businesses in developing countries to take the same approach.

This dynamic impulse gives developing countries a major and growing stake in how their companies are regulated and protected abroad. Combine that with worldwide acceptance of the net benefits that inward FDI brings and it is evident that the political economy of investment protection has changed fundamentally. Now, developed countries and an enlarging group of developing countries have a stake in sound regulation that encourages cross-border investment, whereas recipients of FDI have an enlarging source pool from which to draw.

Unfortunately, the regulation of FDI has not kept pace. The predominant form, bilateral investment treaties, remains unsatisfactory on a number of levels and is not adapted to the world of operating global value chains. For example, many developing countries, and a few developed countries, are not comfortable with international investment arbitration and associated investor-state dispute settlement. Partly as a result of this, regional investment agreements are picking up pace and should be encouraged. However, the overall result will be inherently limited to the regional grouping negotiating the arrangement and, as such, not necessarily suited to the operation of global value chains, which cut across regional groupings.

Therefore, multilateral rules to support investment related to the expansion of global value chains are needed. The logical home for such rules is the WTO. The WTO provides a sound platform for the regulation of global trade and has proved to be a bulwark against insurgent protectionism generated by the global economic crisis. The jewel in the crown is the dispute settlement mechanism, which is the envy of many international organizations.

Unfortunately, the WTO’s regulation of investment is patchy at best. Since investment is the flip side of trade, and a crucial vehicle for expansion of global value chains, this is a significant gap in the multilateral rules framework.

Member states need to consider how this could be improved. Given the historical sensitivities on investment regulation, this consideration should begin with establishing a working group under the aegis of the WTO, with a view to airing the issues. It should be complemented by a discussion in the G20 heads of state summit process, since the G20 can task key international organizations to conduct the technical work required to support a negotiating process in the WTO.

All opinions expressed are those of the author. The World Economic Forum Blog is an independent and neutral platform dedicated to generating debate around the key topics that shape global, regional and industry agendas.